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19 July 2013

History’s Bitch #nlpoli

A half century ago, a bunch of very smart fellows – some of the smartest fellows of any generation ever – wanted to build a massive plant in the middle of Labrador to make electricity.

One of the problems the project faced was a combination of costs and markets. As Philip Smith recounts in Brinco: the story of Churchill Falls, the very smart men were concerned right from the start that nuclear power offered an almost unbeatable alternative to hydroelectricity for generating large amounts of electricity at relatively low cost. The markets needed power and nuclear could do it cheaper.

Nuclear power also had a huge advantage hydro couldn’t match: you can turn the plant on and off when you wish. With hydro, you can make power only when you have the water. Even with a massive reservoir, the generating output of the plant will go up and down during the year depending on how much water is available.As it turned out, the Brinco boys managed to cut a deal with Hydro-Quebec to sell electricity at a price that seemed decent at the time. The 1973 oil crisis started making other sources of electricity more costly than they had been. And in 1979, a mere eight years* after first power from Churchill Falls, the accident at a nuclear power plant at Three Mile Island basically killed the future of nuclear power in North America.

How truly bizarre it must be for the people behind Muskrat Falls to watch many of the same factors at play again but this time with the opposite result. The shale gas revolution in the United States has basically gutted the American market, flooding the United States with as much cheap electricity as the Yanks can use.

Natural gas prices peaked in 2008 and, as energy economist Jean-Thomas Bernard noted in a recent interview. And within six months of the peak, gas was trading far below the peak.

The gas is everywhere including offshore Newfoundland and Labrador and likely onshore as well. For anyone who is still doubting, you can now understand why Nalcor abandoned plans to develop the Lower Churchill as an export venture well before 2010.

They groped around for something to build and settled on Muskrat Falls. They’d make it work by forcing taxpayers in Newfoundland and Labrador to pay the full cost of the whole plant even though there were cheaper alternatives and the consumers wouldn’t need Muskrat Falls – even theoretically – for almost 30 years into the future.

One of the cheaper alternatives, ironically enough was shale gas. Such was the threat of cheap gas to the massively expensive Muskrat Falls (<600 MW for at least $6.5 billion) that Nalcor had the government give them a legal monopoly on supplying electricity to the island of Newfoundland.

Some Muskrat Falls proponents still talk about potential export sales, despite the fact that the anti-free enterprise Muskrat Falls policy on the island violates American trade regulations for energy. Even if Nalcor could sell Muskrat Falls electricity in the States, Nalcor already knows the arse is out of that market. The company’s 2012 annual report notes that net revenue from energy exports fell from $47.1 million in 2011 to $21.2 million in 2012.

Nalcor puts off that drop to a milder than expected American winter but that’s just too dramatic decline in 12 months for such a fluffy explanation. Looks at Hydro-Quebec and you can see that Nalcor’s explanation just doesn't hold up. As Bernard noted in the interview quoted above, Hydro-Quebec is selling electricity in the States for four cents a kilowatt hour when it costs them 10 cents per to make it. That’s the impact of shale gas: lower prices on the long-term market and on the spot market, where Nalcor operates.

Things are not really any brighter on the Canadian side of the border either. New Brunswick has been importing electricity from shale gas for some time now. That’s allowed them to shutter their expensive and dirty thermal plants. They are also getting a refurbished Point Lepreau nuclear plant back as well.

New Brunswick energy minister Craig Leonard is looking for someone else to pay for cost over-runs on the refurbishment, but still he knows the value of what his province has:

"If you look at the market today and try to obtain 700 megawatts baseload of emission-free power for $2.4 billion, you're probably going to be searching for quite a while," he said. "So we know it's a good deal for New Brunswick."

The refurbishment should extend the plant life by another 27 years. Do the math: one third of the current estimated cost of Muskrat Falls with a third more generating capacity.

New Brunswickers will have a hard time finding anything cheaper than Point Lepreau. Newfoundlanders and Labradorians will have a hard time finding anything more expensive than Muskrat Falls. The situation Bernard describes for Quebec also applies to Newfoundland and Labrador:

Today, transporting electricity all the way from James Bay can represent up to a third of the cost,” says the professor.

“During the 1970s, oil prices spiked, and that made hydro power very appealing. For many years, the rates paid by Quebec consumers were probably the lowest in the world.”

“After years of selling our hydro to the Americans, we Canadians will soon have to buy gas produced in the northeastern United States,” notes Bernard. “The reserves aren’t endless, of course, but they’re plentiful… and tapping shale gas will cost a lot less than any other type of electricity, hydro included.”